I've written about Brazil pre-Lula and post-Lula and spent the last five years covering all aspects of the country for Dow Jones, Wall Street Journal and Barron's. Meanwhile, for an undetermined amount of time, and with a little help from my friends, I will be parachuting primarily into Brazil, Russia, India and China. But will also be on the look out for interesting business stories and investing ideas throughout the emerging markets.

Russia-Ukraine Peace Talk Fails, Sanction Threat Intensifies

Russian equities are down again as political risk leans heavily towards more sanctions. On Thursday, cease-fire talks between Vladimir Putin and Ukraine president Petro Poroshenko went nowhere. The market was betting on a truce.

The Market Vectors Russia (RSX) exchange traded fund dropped 2.18% by noon. Russian investors will now wait until the dust settles rather than risk RSX heading back towards the year’s lows of around $21 a share.

“This is a big underweight for us,” says Nicolas Jaquier, an emerging markets economist for Standard Life Investments, a $333.6 billion asset manager in the U.K. “We’re very negative on Russia.”

The failure of the recent talks lies in the fact that neither are willing yet to budge on the others’ key demands. Poroshenko is insisting that Russia stop the inflows of men and materials of any kind into eastern Ukraine. Much of the support — including recent humanitarian aid — is going to pro-separatist rebels in cities like Luhansk and Donetsk.

In Russia, Putin is demanding that Kiev legitimize the rebels, particularly their view that the toppling of the pro-Moscow Viktor Yanukovich government in February was an unconstitutional coup. Ethnic Russians make up nearly half of the population of the major eastern Ukrainian cities. Where they made up more than half, they have voted to secede and join Russia. That’s the Crimea peninsula in particular. On March 16, the autonomous region in Ukraine’s Black Sea voted to become part of Russia. It was officially annexed on March 17, setting off a laundry list of sanctions from Brussels and Washington, all of them tightly focused on rich oligarchs believed to be financially or logistically supporting the rebels.

Ukraine military will have more work to do in eastern Ukraine as cease-fire talks between Moscow and Kiev fail. Obama threatens more sanctions as a result.

Months later, the sanctions targeted private companies. And more recently, went after big banks like the VTB Group, defense contractor Almaz Antey, and banned some economic ties with Russia’s oil and gas companies such as the sharing of technology used in fracking for natural gas.

For his part, Putin still says that a political solution is the only path to resolving the ongoing civil war in east Ukraine and is demanding greater autonomy to the more Russian-sympathetic regions of the country. Kiev hates this idea and largely sees it as a Balkanization of the country. Again, the most recent autonomous zone opted to leave Ukraine altogether. What is to stop Luhansk from doing the same if tensions worsen between pro-Russian rebels and the Ukrainian military? Non-profit groups have been sets up at least three industrial centers in the east, believed to be funded by Russians, as a propaganda effort designed to convince the locals to become autonomously governed regions of Ukraine.

The political rhetoric is now hardening.

The recent parade by rebels of Ukrainian prisoners of war is just one example. The New York Timesreported on Aug. 25:

The Ukrainian government, however, will not accept any legitimization of the main rebel group here, the Donetsk People’s Republic, [Oleh Voloshyn, a former Ukrainian diplomat] said, particularly after the public abuse of prisoners. “After yesterday’s parade of prisoners of war, the sympathy toward the people of the Donbass is low in other regions in Ukraine,” he said, making it politically difficult for Mr. Poroshenko to negotiate, something that factions in the separatist movement intent on drawing in Russian peacekeepers want, Mr. Voloshyn said. “Most Ukrainians want peace. But if it comes to a choice between total humiliation and war, they will choose war.”

For the moment, it does not look like Putin or Poroshenko will give ground on their key demands. Civil unrest will continue. And that means greater volatility for Russian securities, and the threat of greater sanctions.

“The optimist might argue that the pressure is on both to ultimately cave,” says Vladimir Signorelli, president and global economist for Bretton Woods Research LLC, a boutique investment research firm in Mt. Tabor, N.J.

The Russian economy is now on the verge of recession, the ruble now trades at more than 37 per dollar compared to less than 33 at the start of the year, and the Micex index is down more than 7% year-to-date.

The Ukrainian economy is even worse. It is on the verge of collapse, with its 1-year default probability being 34% on Friday based on its credit default swaps. A military victory looks unlikely at this point.

In the U.S. on Thursday, President Obama confirmed Washington’s view that Russia is behind the rebel advance in Ukraine. While refraining from characterizing the increased involvement of Russian military personnel as an invasion, he made clear that the pressure for additional sanctions has grown significantly.

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Forget it, Pootie… Let him have stepped in it for the last time as Russia… bring it to him, and if he decides, looking forward to domestic dissent, let him back out… as long as Moldova and Georgia are restored in FULL. Otherwise, welcome him to a repeat of the dissolution of Russia following Afghanistan. With China hot on his trail for a significant part of Siberia.